5/14/2020 | Team United
Tired of renting? You’ll need to start saving money for a down payment. While a 20 percent down payment can be daunting, here is how to make saving for a home easier than ever.
To set a budget, you should have an idea of the house you want. Square footage, location, and age are just a few factors to consider when thinking about the overall cost. A price range will provide a blueprint for how much to save and how much to put toward your down payment.
Mortgage experts recommend spending 25 to 30 percent of your income on your mortgage. Many will not approve a mortgage if it costs you more than 35 percent. Lenders will also consider your credit score, debts, assets, and liabilities in a mortgage loan application.
Remember, your ideal house will change. If you get married and have kids, you'll probably want more space. Conversely, if you're about to become an empty nester, you may want to downsize. Considering your future will help you pick the best house today.
The rule of thumb is that you need a 20 percent down payment to buy house. If you can pay even more than 20 percent, great! The more money you put down initially, the less you have to borrow. That means you’ll pay less in total interest costs over the life of the loan, too.
There are exceptions to the 20 percent rule. United offers several conventional mortgage loans that dramatically reduce the down payment. FHA loans are a government-backed mortgage with a down payment of 3.5 percent. USDA and VA loans also come with single digital percentages.
There are a couple of other costs to consider before saving. One is private mortgage insurance or PMI. Lenders use it to offset the risk for the home loan. Typically, PMI costs $50 per $100,000 of home.
Buying a home also comes with a ton of fees. Inspection fees. Recording fees. Underwriting fees. In total, these closing costs end up being two to five percent of the total mortgage value. That means if you want to buy a $250,000 house with $50,000 down, you can expect $4,000 to $10,000 in additional fees. If you think those fees are a lot, we agree. That’s why United keeps fees as low as possible. That way, you won’t even need to haggle. If you use a different lender, you can try reducing fees by joining their loyalty program, closing at the end of the month, or asking the seller to contribute.
Even small changes can end up saving you a lot of money. For instance, getting rid of Netflix or Hulu will save you a few hundred dollars. The same goes for canceling your gym membership or changing your daily Starbucks run to every other day.
Some other ways to trim your expenses include:
Having a hard time figuring out what to cut? Print out your last credit card statement and highlight the items that were “nice to have,” but not essential. These expenses are a good starting point for where to start saving.
If you haven’t done so already, make sure your debt is under control. Debt makes it more difficult to set money aside for your mortgage. If you have debt, consider refinancing or consolidating it to make the monthly payments more manageable.
Now let's set the groundwork for savings. Start with your fixed income and outcome. That includes your salary, car insurance, daycare, health insurance, cable bills, and subscriptions. These figures do not change from month to month. Assuming your income exceeds your outcome, you can start setting aside a portion of this discretionary income toward your mortgage.
Technology can make this process easier. Apps, like Digit and Acorns, dedicate small daily amounts toward your down payment fund. The amount is small enough that you wouldn’t notice, and it won’t throw off your budget. With enough time, though, you will see significant progress toward your savings goals.
If your income and outcome are too close for comfort, consider picking up a side hustle. With the ever-expanding gig economy, there are plenty of opportunities to make a quick buck, no matter your skills or interests. That includes, but is not limited to, dog walking, house sitting, tutoring, and selling baked goods.
It is impossible to overstate the importance of consistent saving. Taking a proactive approach will make a world of difference when you decide to make a down payment. If you take one thing away from this article, it should be this: save early and save often.
Still have questions about saving for a home? Talk with one of our mortgage advisors today.